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Tuesday, May 31, 2011

Finding Private Investors for Film Projects - The problems

A recent discovery of an embarrassing example of how NOT to do this triggered an obvious question - how do successful film projects find private investors?

There are plenty of horror stories. While our legal system here in Australia seems to ignore even the most blatant illegal funding schemes there have been occasions when law enforcement has shown an interest - as Robert MacLeod of Starlight films found out when he was sentenced to seven years jail for raising finance for his film projects without a proper prospectus. (The fact he spent that money on himself might not have helped things)

Even the guy who tried to raise money for the film 'Jack the Director' by cold-calling people and inviting them to an investment seminar might have even gotten away with it if he hadn't made the mistake of cold calling the former director of consumer protection at ASIC !

So I thought I'd do a bit of digging to find out more.

But first - let's look at yet another bad example. I've redacted the name of the writer of the project out of decency - he can't be expected to understand the details of film investment. But the production company can.

<Author Name Redacted> has signed with award winning producers at Creative Entertainment and Media, Inc. of Marina Del Ray, CA, to produce his epic sci-fi thriller based on his contemporary novel with a Southwest Native American theme.

<Project Name Redacted> is slated for theatrical release in Spring 2012, with an estimated budget of $30M. Private investors are being sought for equity funding to participate in this high-profile film project. With a marketing rating of PG-13, it is expected to appeal to a wide demographic. A-list talent is tapped for lead roles, with outstanding Native actors onboard for a stellar cast.

<Author Name Redacted> will be directly involved in production as Writer/Producer, working in conjunction with the principals of Creative Entertainment & Media, Inc., Bidwell C. Tyler II, CEO/Executive Producer and Susan B. Flanagan, Emmy Award Winning Writer and Executive Producer, to create a spectacular, award winning motion picture. <Project Name Redacted> is anticipated to be shot in 3D. Interested parties should contact Bidwell C. Tyler II or respond to this ad to receive a detailed Investment Package. Equity investors are guaranteed a high yield return. We will also consider joint venture, co-producer proposals. Producer Credits can be verified by going to IMDB or the CEM website.

(My emphasis added)

Let's break it down for a moment.

It's bad enough from an advertising point of view - it seems to be targeted at investors who are trawling craigslist to find things to spend a few million dollars on.

And what promises do they make?

1. It is 'slated for theatrical release' within about a year.

2. They have certain actors 'onboard'.

3. Investors are guaranteed a high yield return !

The first two are problematic - but it's the third one that is the worse.

It's not the only example of this type of advertisement involving this company. Their admitted business model is to get writers to submit their scripts, then ask the writer to provide money for production costs - creating business plans, etc

Here's another advertisement by a producer at this same company seeking investment

This is slightly better - no promise that is clearly false. Yet it can still fall foul of the law.

How?

The laws covering this are surprisingly similar in many Western countries - they all try to balance the need to protect investors and need to allow people to choose to make risky investments. In both cases, laughable statements like 'Equity investors are guaranteed a high yield return' are clearly a problem.

In Australia the rules are that the party seeking investment must lodge a Prospectus (or 'Disclosure Statement') with ASIC before seeking investment. There is a similar rule in the USA.

Thankfully, however, Australia has exceptions for certain projects - the 'Section 708' exemption and the USA has something very similar.

The two big exemptions used for film here include:

Personal offers to people that you already have a personal or professional connection to. (There is also a limit of 20 investors here, along with a few other issues)

Sophisticated investors - each investor is supplying at least $500k (or they have $250k income p/a or $2.5 million in assets)

So - if you don't know people who can fund a few million dollars then you are left looking for sophisticated investors. There's one catch, though, for those in the USA - even if you only accept sophisticated investors the law in the USA is clear that the offerer usually cannot engage in any public solicitation or advertising. (To be pedantic, it does depend a little on the exact type of exemption used. See Mark Litwak's excellent article here for a good summary of the rules in the USA)

So both advertisements are likely to have issues.

So - if that is the problem ... what is the solution? How do you find investors without falling afoul of the rules?

I've actually run out of space in this blogpost, so I'll provide some examples of successes in an upcoming post.

What you call "sophisticated investors" are actually called "accredited investors," that is, they are wealthy enough to withstand the risk.

"Sophisticated" investors are those who understand the business of investing enough to be able to safely evaluate the risks for themselves, for example, stock brokers and professional financial planners. Sophisticated investors don't need to have a minimum income or net worth.

I agree that it's a bizarre phrase, but 'sophisticated investor' is the recognised phrase in my juristiction. It gets used because it's codified in law - in Australian securities rules it is Chapter 6D of the Corporations Act 2001.

Just to be confusing, Chapter 7 refers to the same group as 'Wholesale clients' ... making up another phrase for the same concept!

I agree it is the stupidest phrase ever ... but alas that's the accepted phrase in many places.

I'll try to use 'accredited investor' when talking about the USA though ... they've done the smart thing and come up with a better phrase.